Federal judges in California are cracking down on warped incentives in class-action lawsuits, exerting tighter oversight of settlements that provide hefty fees for plaintiff lawyers but no meaningful benefit for those harmed by corporate misdeeds.
A recent example was the proposed $50-million settlement over a customer-data breach at Yahoo Inc.
U.S. District Judge Lucy Koh blocked that settlement, saying a request by plaintiffs’ lawyers for an additional $37.5 million in compensation for their work on the case was excessive. She also criticized Yahoo for a lack of transparency about how many people were affected and for trying to use the deal to avoid liability in an unrelated breach.
Koh’s actions epitomize new court guidelines in San Francisco and Silicon Valley that require more justification for class-action settlements in California, a state with some of the toughest consumer-protection laws. Judges are nixing more deals, including some with companies such as Uber Technologies Inc. and Wells Fargo & Co. The increased scrutiny may mean fewer settlements and more cases going to trial.
“The rules are to ensure that class members are adequately protected,” said Neal Marder, an attorney with Akin Gump Strauss Hauer & Feld in Los Angeles. “Lawyers come up with clever ways to settle a case that isn’t always in the best interest of the class.”
Granting class-action status to a lawsuit is supposed to put more power in the hands of the little guy. It allows a single plaintiff to sue on behalf of a larger group of people who were harmed by the same act but may have little incentive to take a company to court over a relatively small claim.
Some class actions work as intended, such as when Volkswagen agreed to spend $10 billion in 2016 to buy back 500,000 vehicles with polluting diesel engines. The vast majority are settled once they are elevated from individual claim to class action. Most businesses want to avoid going to trial, where they risk losing in a huge jury verdict.
But when companies settle, some of their deals provide no tangible benefits for the people the suits were intended to help.
In one noteworthy 2016 case involving Subway sandwich shops — prompted by a teenage customer who was sold an 11-inch-long sandwich rather than the 12 inches the company advertised — the U.S. appeals court in Chicago derided a class-action settlement as “utterly worthless.” The Subway deal called for each restaurant to “achieve better bread-length uniformity” on all its foot-long sandwiches.
Plaintiffs’ lawyers sought $520,000 in fees for negotiating the settlement with Subway, even though most customers understand that variations in bread-making mean sandwiches may not be exactly 12 inches long, the court ruled. It said such deals amounted to “rackets” for lawyers.
Even when agreements call for a more tangible damage award, such as cash, most class members don’t end up with anything. A 2013 study by Mayer Brown, at the request of the U.S. Chamber Institute for Legal Reform, looked at 148 class-action suits filed in 2009 and found that when people have to file a claim to participate in a settlement, very few bothered to do it, with responses in some cases below 1%.
In November, the federal court in Northern California updated guidelines for proposed class-action settlements, giving judges more leeway to reject deals that don’t deliver for the group of intended beneficiaries. Among the new rules: Parties must provide a lot more information about how the amount of the settlement was reached and how, specifically, they’ll make sure class members get their share.
“Judges will want a genuine assessment of the value of the case,” said Thomas Loeser, an attorney with plaintiff law firm Hagens Berman Sobol Shapiro in Seattle. “The new guidelines will make all class settlements better because judges will be equipped to detect marginal cases.”
Judges also are looking more closely at the non-monetary portion of a proposed deal, which may mean corporate defendants will pay more to settle strong cases and will fight more of the weaker ones, Loeser said. As a result, more could end up at trial.
In class actions, judges aren’t just impartial referees. They’re obligated to represent the interest of class members who aren’t participating in the litigation but still stand to benefit from a settlement.
Federal judges Edward Chen and Richard Seeborg, who sit on the court in San Francisco, said in January that the updated guidelines give them more tools to vet class-action deals. During a forum at the University of San Diego School of Law, the judges said they were particularly keen to get more specific details about what will happen after they approve a settlement and how the parties will ensure that as many people as possible participate.
“There’s a lot that we don’t know, for example, about claims administration,” Seeborg said.
Class-action payout rates tend to be very low because most people don’t understand the notices they get about the settlement or simply don’t believe them, said Elizabeth Cabraser, an attorney with Lieff Cabraser Heimann & Bernstein, one of the plaintiffs’ lawyers in the Volkswagen class action.
“A good settlement is like any other good product — you need to market it,” Cabraser said.
Cases involving people who bought flawed products at a retail outlet can be challenging because finding each one is time-consuming and expensive, Cabraser said. The new guidelines will give plaintiffs’ lawyers more leverage to demand that defendants make more of an effort to identify class members, she said.
The more aggressive rules in Northern California could be copied in other federal districts, though they may already be having an effect, said Michael Brody, co-chair of the class action practice at Jenner & Block in Chicago. Corporate defendants may need to sweeten the pot more to ensure settlements please judges, he said.
“Negotiating a settlement that looks good for the defendant isn’t good if it doesn’t get approved,” Brody said.